How to pay taxes on investing in Hong Kong spot Bitcoin ETFs?
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How to pay taxes on investing in Hong Kong spot Bitcoin ETFs?
This article will analyze and summarize the tax-related issues concerning Hong Kong's Bitcoin ETFs.
Navigating Web3 tides with focused insightsAuthor: TaxDAO
Following the U.S. Securities and Exchange Commission's approval on January 10 of the first batch of 11 spot Bitcoin ETFs, Hong Kong's financial market has also made progress in incorporating virtual assets. On Monday, April 15, public disclosures indicated that Boshi International, ChinaAMC (Hong Kong), and Harvest Fund Management (Hong Kong)—Hong Kong subsidiaries of mainland China-based public mutual funds—have received in-principle approval from the Securities and Futures Commission (SFC) of Hong Kong to launch spot virtual asset ETF products. Upon final authorization, fund managers will be permitted to provide virtual asset management services to investors and apply to regulators for the issuance of ETFs investing directly in spot Bitcoin and spot Ethereum. Ordinary investors will be able to subscribe to these products through the Hong Kong Stock Exchange.
Previously, TaxDAO published an analysis on tax implications of Bitcoin ETFs in Hong Kong. This article summarizes and reiterates the key points.
1. Conditions for Investor Participation
The Hong Kong government has enacted legislation governing cryptocurrency trading. Only exchanges licensed by the SFC are legally allowed to conduct crypto trading. However, since ETFs are not considered direct purchases of virtual currencies, under current Hong Kong regulations, cryptocurrency ETFs are classified as investment funds and therefore subject to fund regulation. As long as a cryptocurrency ETF is lawfully listed with the SFC and the Hong Kong Stock Exchange, it may be purchased through legal channels.
In terms of current trading mechanisms in Hong Kong, anyone purchasing an ETF must buy a minimum specified number of fund units, and differing minimum thresholds result in variations in trading activity and costs. For example, the entry threshold for Samsung’s actively managed Bitcoin futures ETF is 50 units, while that of CSOP Bitcoin Futures ETF (3066.HK) is 100 units. Additionally, investor restrictions exist. According to the Joint Circular, sales of virtual asset-related products must comply with requirements in relevant jurisdictions. Specifically, spot virtual asset ETFs are prohibited from being sold directly or indirectly to investors in mainland China. These products cannot be offered or sold for the benefit of legal entities or natural persons in mainland China. Without prior necessary governmental approvals from mainland Chinese authorities, such entities or individuals may not directly or indirectly purchase Bitcoin ETFs.
2. Tax Treatment for Hong Kong and Singapore Residents Investing in Bitcoin ETFs
The underlying taxation of Bitcoin ETFs is broadly similar to other ETFs, involving capital gains tax, income tax, and withholding tax. The sale of an ETF constitutes a taxable capital gains event, whereas redemption typically does not trigger tax liability. Dividends earned from ETF investments in other jurisdictions may be subject to withholding tax.
It should be noted that Bitcoin ETFs do not offer dividends or distributions, as they track the price of Bitcoin rather than traditional company stocks. In Hong Kong, investors in Bitcoin ETFs generally do not need to pay profits tax on capital gains realized from selling ETF units. However, specific tax treatment may vary depending on the investor's jurisdiction of residence, location of investment, holding period, and other factors.
2.1 Tax Treatment for Hong Kong Residents Investing in Hong Kong Bitcoin ETFs
Under Hong Kong's tax system, the principle of territoriality applies: only profits or income arising in or derived from Hong Kong are subject to taxation. Generally, both individuals and corporations in Hong Kong are not required to pay capital gains tax. Therefore, profits earned from investing in Bitcoin ETFs are typically exempt from capital gains tax.
Regarding the classification of "capital gains," Hong Kong authorities state that gains from the sale of investment securities held for long-term investment purposes are of a capital nature. Conversely, gains arising from short-term trading activities may be deemed revenue in nature and thus taxable. Hence, if an investor engages in frequent trading with short holding periods, the profit from trading Bitcoin ETFs may be classified as trading income and become subject to Hong Kong profits tax (commonly understood as income tax). In other words, as long as individual or corporate Hong Kong residents do not generate profits through frequent trading of Bitcoin ETFs, they generally do not need to pay taxes on such gains.
2.2 Tax Treatment for Singapore Residents Investing in Hong Kong Bitcoin ETFs
Singapore generally does not impose taxes on capital gains realized by individuals or corporations. However, similar to Hong Kong, if investments are held for short durations and involve frequent trading, gains from the disposal of securities or equity interests may be treated as business income and become taxable to prevent tax avoidance.
At the investor level, Singapore also follows the territorial principle, taxing only income arising in or derived from Singapore. Individuals and companies are typically not liable for capital gains tax.
Specifically, regarding investment in Hong Kong Bitcoin ETFs, individual Singaporean investors are generally not taxed in Hong Kong on gains (as no tax usually applies there). When capital gains are remitted into Singapore, they are typically not taxable under Singaporean tax law.
For corporate investors, the Singapore Ministry of Finance proposed the Income Tax (Amendment) Bill No./2023, which introduced Section 10L, updating the foreign-sourced income exemption framework. Under this rule, gains derived by a company on or after January 1, 2024, from the disposal of "foreign assets" (i.e., any rights or interests located outside Singapore) will be regarded as taxable income under paragraph (g) of Section 10(1) of the Income Tax Act for the relevant assessment year. This means that Singapore-incorporated companies investing in Hong Kong Bitcoin ETFs will incur corresponding income tax obligations and must file and pay taxes according to Singaporean regulations.
Additionally, for conventional ETFs, dividend income received by a Singapore resident company from overseas sources may qualify for tax exemption if the following conditions are met: (1) at the time the foreign-sourced income is received in Singapore, the highest headline corporate tax rate in the foreign jurisdiction is at least 15%; (2) the income has already been taxed in the foreign jurisdiction; and (3) the tax authority considers the exemption beneficial to the resident company.
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